Bankruptcy Abuse Prevention And Consumer Protection Act (BAPCPA)

Bankruptcy Abuse Prevention And Consumer Protection Act (BAPCPA) of 2005 is a legislation that revised the United States Bankruptcy Code for cases filed on or after October 17, 2005. In April 2005, BAPCPA was passed by Congress and signed into law by President George W. Bush as a move to reform the bankruptcy system.

Under Chapter 7 bankruptcy, most unsecured consumer and business debts are forgiven or discharged. This bankruptcy plan also allows for the liquidation and sale of certain assets by a designated trustee in order to repay creditors. On the other hand, bankruptcy filed under Chapter 13 requires debtors to repay a portion of the debt before a debt discharge is considered. Chapter 13 bankruptcy requires debtors to restructure their debts and create a three- to five-year repayment plan, under which the debtor will use his future income to pay off his creditors in part or in full. Bankruptcy Abuse Prevention And Consumer Protection Act (BAPCPA) was introduced to make it more difficult for debtors to file for Chapter 7 bankruptcy and, instead, to file for Chapter 13.

The Act created a bankruptcy means test that determines whether individuals filing for bankruptcy can file for Chapter 7 bankruptcy, which discharges many debts in full, or whether they must opt for Chapter 13 bankruptcy, which requires at least partial repayment of debts. Furthermore, the Act increased to eight years, the waiting period from when an individual last filed Chapter 7 bankruptcy to when they may file again.

Essentially, the purpose of BAPCPA was to make it more difficult for higher-income individuals to qualify for Chapter 7 bankruptcy by more closely examining the filer's ability to repay his or her debts. The means test compares the debtor's monthly income to the median income (which depends on the size of the household) in his or her state of residence and provides an allowance for assumed monthly expenses, at rates determined by the IRS, as well as an allowance for actual monthly expenses. If the individual exceeds the median income and has some money left over after accounting for living expenses, he or she will usually not qualify for Chapter 7 bankruptcy. In effect, three outcomes are possible from the means test:

1. A debtor will pass the means test if his monthly disposable income is less than $117. He will, thus, be able to file for Chapter 7 bankruptcy without any problem.
2. A debtor will fail the test if his disposable income each month is more than $195. In this case, he must proceed under Chapter 13.
3. If a debtor’s disposable income lies between $117 and $195 per month, the income should be multiplied by 60 (BAPCPA’s assumption that the debt will be paid off in approximately 5 years, or 60 months). If the resulting value can cover at least 25% of the non-priority unsecured debt, the debtor will fail the test. Otherwise, he can proceed to file for bankruptcy under Chapter 7.

To complete a means test, a debtor must submit either a Form 22A for Chapter 7 or a Form 22C for Chapter 13 to the Bankruptcy Court before the court will hear the case.

BAPCPA also set in place mandatory credit counseling for consumers and businesses looking to file for bankruptcy. This requires the debtor to complete an accredited non-profit credit counseling program no more than 180 days before s/he files.

To avoid potential abuse of the bankruptcy system, BAPCPA exempts certain debts from discharge. Some of these debts are:

• More than $750 in cash advances on a credit card taken out within 90 days of filing
• More than $500 charged on a credit card for luxury goods within 90 days of filing
• All federal and private student loans